1.This Act may be cited as &short-title1;
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2.References to general partners
(a)Exclusion of certain active businesses from at risk rulesSubclause (I) of section 465(c)(7)(D)(ii) of the Internal Revenue Code of 1986 (defining qualified corporate partner) is amended to read as follows:
(I)such corporation is not prohibited or limited under State law from participation in the management or business of the partnership..
(b)Payments to retiring partnersSubparagraph (B) of section 736(b)(3) of such Code (relating to limitation on application of paragraph (2)) is amended to read as follows:
(B)any portion of the retiring or deceased partner’s distributive share of partnership income was subject to tax under section 1401..
(c)Foreign currency transactionsSubclause (I) of section 988(c)(1)(E)(v) of such Code is amended to read as follows:
(I)The interest of a partner in the partnership shall not be treated as failing to meet the 20-percent ownership requirements of clause (iii)(I) for any taxable year of the partnership if for the taxable year of the partner in which such partnership taxable year ends—
- (aa)the partner is not limited as to participation in the management or activity of the qualified fund, and
- (bb)such partner (and each corporation filing a consolidated return with such partner) had no ordinary income or loss from a section 988 transaction which is foreign currency gain or loss (as the case may be).
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(d)Special valuation rules for generation-skipping taxClause (ii) of section 2701(b)(2)(B) of such Code (relating to partnerships) is amended to read as follows:
(ii)in the case of a limited partnership, the holding of any interest as a partner who is not limited as to participation in management or activity of the partnership..
(e)Paragraph (7) of section 6231(a) of such Code (defining tax matters partner) is amended to read as follows:
(7)
(A)The tax matters partner of any partnership is—
(i)the partner designated as the tax matters partner as provided in regulations, or
(ii)if there is no partner who has been so designated, the partner having the largest profits interest in the partnership at the close of the taxable year involved (or, where there is more than 1 such partner, the 1 of such partners whose name would appear first in an alphabetical listing).
(B)If there is no partner designated under subparagraph (A)(i) and the Secretary determines that it is impracticable to apply subparagraph (A)(ii), the partner selected by the Secretary shall be treated as the tax matters partner. The Secretary shall, within 30 days of selecting a tax matters partner under the preceding sentence, notify all partners required to receive notice under section 6223(a) of the name and address of the person selected.
(C)Restriction on designation of partnerA partner may not be designated as a tax matters partner under subparagraph (A)(i) unless such partner is not limited as to participation in management or activity of the partnership..
(f)The amendments made by this section shall apply to taxable years beginning after December 31, 2004.
3.References to limited partners
(a)
(1)Subparagraph (A) of section 464(e)(2) of the Internal Revenue Code of 1986 (defining limited entrepreneur) is amended by striking other than as a limited partner
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(2)
(A)Section 464(c) of such Code is amended—
(i)by striking limited partners or
in paragraph (1)(B),
(ii)by striking a limited partner or
in paragraph (2).
(B)Section 1256 of such Code is amended—
(i)by striking limited partners or
each place it appears in subsections (e)(3)(B) and (f)(4),
(ii)by striking a limited partner or
in subsection (e)(3)(C), and
(iii)by striking limited partner or
both places it appears in the heading and text of subsection (e)(4)(A)(i).
(C)Section 1258(d)(5)(C) of such Code is amended—
(i)by striking limited partner or
in the matter preceding subclause (i),
(ii)by striking “limited partner’s (or limited entrepreneur’s) in subclause (i) and inserting “limited entrepreneur’s”, and
(iii)by striking partners and limited
in the heading.
(b)
(1)Subsection (h) of section 469 of such Code is amended by striking paragraph (2) and by redesignating paragraphs (3), (4), and (5) as paragraphs (2), (3), and (4), respectively.
(2)Subparagraph (A) of section 469(c)(7) of such Code is amended by striking the last sentence.
(3)Paragraph (6) of section 469(i) of such Code is amended by striking subparagraph (C) and by redesignating subparagraph (D) as subparagraph (C).
(4)Subsection (f) of section 772 of such Code (relating to special rules for applying passive loss limitations) is amended to read as follows:
(f)Special rules for applying passive loss limitations
(1)If any person holds an interest in an electing large partnership other than as a partner described in paragraph (3)—
(A)paragraph (2) of subsection (c) shall not apply to such partner, and
(B)such partner’s distributive share of the partnership items allocable to passive loss limitation activities shall be taken into account separately to the extent necessary to comply with the provisions of section 469.
(2)Paragraph (1) shall not apply to any items allocable to an interest held as a partner described in paragraph (3).
(3)For purposes of this subsection, a partner is described in this paragraph if the partner is a person whose participation in the management or business activity of the partnership is limited under applicable State law..
(c)The amendments made by this section shall apply to taxable years beginning after December 31, 2004.
4.Partnership income attributable to capital excluded from net earnings from self-employment
(a)Paragraph (13) of section 1402(a) of the Internal Revenue Code of 1986 is amended to read as follows:
(13)there shall be excluded the distributive share of net income of a partner attributable to capital;.
(b)Partnership income attributable to capitalSection 1402 of such Code is amended by adding at the end the following new subsection:
(l)Partnership income attributable to capital
(1)For purposes of subsection (a)(13), the following amounts shall be treated as income attributable to capital—
(A)the amount, if any, in excess of what would constitute reasonable compensation for services rendered by such partner to the partnership, and
(B)an amount equal to a reasonable rate of return on unreturned capital of the partner determined as of the beginning of the taxable year.
(2)For purposes of paragraph (1)—
(A)The term unreturned capital means the excess of the aggregate amount of money and the fair market value as of the date of contribution of other consideration (net of liabilities) contributed by the partner over the aggregate amount of money and the fair market value as of the date of distribution of other consideration (net of liabilities) distributed by the partnership to the partner, increased or decreased for the partner’s distributive share of all reportable items as determined in section 702. If the partner acquires a partnership interest and the partnership makes an election under section 754, the partner’s unreturned capital shall take into account appropriate adjustments under section 743.
(B)Reasonable rate of returnA reasonable rate of return on unreturned capital shall equal 150 percent (or such higher rate as is established in regulations) of the highest applicable Federal rate, as determined under section 1274(d)(1), at the beginning of the partnership’s taxable year.
(3)The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection..
(c)The amendments made by this section shall apply with respect to services performed in taxable years beginning after December 31, 2004.
5.Repeal of ability to elect large partnership reporting rules
(a)Paragraph (2) of section 775(a) of the Internal Revenue Code of 1986 (relating to election) is amended by adding at the end the following: No election under this subsection shall be made after December 31, 2004.
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(b)The amendment made by this section shall apply to partnership taxable years beginning after December 31, 2004.